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Marrs And Smith Partnership v. D.K. Boyd Oil And Gas Co.

Court of Appeals of Texas, Eighth District, El Paso

November 17, 2005

MARRS AND SMITH PARTNERSHIP, Appellant
v.
D.K. BOYD OIL AND GAS COMPANY, INC., Appellee.

          Appeal from 143rd District Court of Loving County, Texas (TC# 00-02-708-CVL)

          Before Barajas, C.J., McClure, and Chew, JJ.

          OPINION

          ANN CRAWFORD McCLURE, Justice

         Marrs and Smith Partnership appeals from a judgment in favor of D.K. Boyd Oil and Gas Company. We affirm in part and reverse and remand in part.

         FACTUAL SUMMARY

         D.K. Boyd is the chief executive officer and controlling decision maker of D.K. Boyd Oil & Gas Company and D.K. Boyd Land & Cattle Company. [1] In early 1996, Boyd entered into a real estate sales contract with the Scarborough-Linebery Foundation to purchase the Frying Pan Ranch located in parts of Loving, Winkler, and Andrews County, Texas, and Lea County, New Mexico. The ranch consists of 136, 000 surface acres and 60, 170 mineral acres. The prior owners had not encouraged the development of oil and gas production on the ranch, nor was the ranch being utilized as a cattle operation. Mr. Boyd believed that both aspects of the ranch had potential for development. He planned to finance the $13.5 million purchase by borrowing $6 million and selling portions of the mineral estate to investors to raise the remainder. The Foundation permitted Mr.Boyd to manage operations of the ranch for several months prior to closing.

         During this time period, Rickey Smith approached Mr. Boyd with a proposal to provide mineral buyers in exchange for a share of the mineral estate. Smith owns a controlling interest in Marrs & Smith Partnership (the Partnership) which invests in oil and gas leases. In August of 1996, Boyd entered into a joint participation agreement with the Partnership. [2] The agreement required the Partnership to pay Boyd $200, 000 and to sell 75 percent of the mineral estate for $7.5 million in time for the closing of the Frying Pan Ranch purchase. If the Partnership succeeded, it would own an undivided 12 percent interest of Boyd's retained 24 percent interest in the mineral estate, [3] but if it failed, it would forfeit the $200, 000 payment as liquidated damages. The Partnership did not sell 75 percent of the mineral estate and forfeited the $200, 000 payment.

         Having failed to obtain a share of the ranch minerals, the Partnership entered into a new agreement with Boyd on November 27, 1996. Under this purchase and sale agreement, the Partnership agreed to purchase 20 percent of the mineral estate for $1.6 million. [4] Mr. Boyd agreed to apply the forfeited $200, 000 toward the purchase.

         Boyd had obtained extensions of the sales contract from the Scarborough-Linebery Foundation with the understanding that if the ranch purchase did not close by December 11, 1996, the sales contract would terminate and Boyd would lose the ranch. On the day before the December10, 1996 closing, the Partnership reneged on its obligations under the purchase and sale agreement which left Boyd short of the purchase price for the ranch. The Partnership proposed a new agreement: (1) the Partnership would provide Boyd with $1.3 million needed for closing; (2) Boyd would convey a 20 percent interest in the mineral estate; (3) Boyd would pay $1.7 million to the Partnership by December 10, 2005 or convey 20 percent of the surface to the Partnership; [5] and (4) the Partnership could claim 20 percent of the annual depreciation on ranch assets. Smith represented to Mr. Boyd that the $1.7 million could be paid back by including him in future deals that Boyd put together. Boyd accepted Smith's terms and closed on the ranch on December 10, 1996. At the closing, Boyd conveyed an undivided 20 percent of the mineral estate to the Partnership and conveyed other portions of the mineral estate to other purchasers. Boyd retained approximately 1/3 of the mineral estate. Under the agreement with the Partnership, Boyd also retained the executive rights to the Partnership's mineral interest, but the Partnership was entitled to have the executive rights conveyed upon request.

         After the closing, Boyd presented the Partnership with several prospects in an effort to reduce the $1.7 million obligation, but all of these were rejected. One of these prospects included Boyd's planned purchase of Plains Radio Petroleum in 1998. PRP's assets included the LE Ranch. As he had done with the Frying Pan Ranch, Mr. Boyd intended to pre-sell mineral interests to investors, including Smith and the Partnership, in order to fund the purchase. Smith and Michael Black had agreed to purchase a 1/3 interest in the mineral estate for a sum certain, but shortly before the closing, Smith and Black changed the terms of the agreement by demanding a 50 percent interest in the surface estate. When Boyd rejected their demand, Smith and Black did not participate in the deal. On December 16, 1998, Boyd sold several oil and gas leases on the Frying Pan Ranch to SB Oil Properties, a partnership between Smith and Black. Since the oil and gas production would be operated by one of Smith's companies, Smith & Marrs, Inc. (SMI), Boyd required that SMI execute a Surface Damage Agreement before it assumed operations. Smith, in turn, required Boyd to execute a document reflecting the $1.7 million obligation that the Partnership and Boyd had entered into two years earlier at the closing on the Frying Pan Ranch.

         Following his acquisition of the Frying Pan Ranch, Mr. Boyd organized the surrounding landowners and coordinated an effort to have Western Geophysical conduct a speculative three dimensional seismic shoot of the ranch and surrounding areas in order to increase the potential for development of the minerals. In a speculative shoot, the geophysical company sells seismic data to different oil and gas companies which can lease the minerals if the data is promising. The geophysical company typically pays surface damages to the property owner for the right to come onto the property and conduct the seismic shoot. Western Geophysical agreed to pay $10 per acre to the property owners, including Boyd. Western permitted Boyd to license the 3D seismic data for $8, 000 per section, which is below the rate it normally charged.

         Mr. Boyd continued to pursue efforts to develop the ranch's oil and gas potential. He hired a geologist, David Miller, to review all of the data available and to construct subsurface geological maps of the entire ranch. He also hired Jasha Cultreri, a preeminent geophysicist, to evaluate the 3D seismic data for potential prospects. Because ownership of the mineral interest was fragmented, Mr.Boyd retained three landmen to complete mineral deed takeoffs on a substantial portion of the ranch's mineral interests. This process took several months and cost Boyd over $100, 000.

         In order to take the leases that had been identified by the landmen, Boyd entered into an Oil and Gas Exploration and Development Agreement with Rutter and Wilbanks Corporation (Rutter) in 1999. Under this agreement, Rutter reimbursed Boyd for a portion of the expenses already incurred. Boyd would lease minerals underlying the Frying Pan Ranch based on the mineral deed takeoffs and assign the leases to Rutter. Rutter, in turn, was required to market these prospects to oil and gas companies. Prior to reaching this agreement with Rutter, Boyd made the same proposal to the Partnership, but it declined to participate.

         Over an eleven month period, Boyd's entire office staff worked exclusively on the negotiation of approximately 234 oil and gas leases. On August 1, 1999, Boyd leased its own minerals (the Boyd Lease). Boyd also exercised the retained executive rights on the Partnership's minerals and leased those as well (the Smith Lease). The terms of the two leases were identical. On August 3, 1999, Boyd paid the Partnership the lease bonus for the first year of the Smith Lease in the amount of $38, 144.58. The Smith and Boyd Leases were recorded in Loving County on August5, 1999. The Partnership ratified the Smith Lease on August 12, 1999. While Boyd assigned the Boyd Lease to Rutter, Smith refused to assign the Smith Lease.

         In 1999, Boyd retained Cheyenne Land Management Services to undertake an environmental audit of potentially contaminated sites on the Frying Pan Ranch. Cheyenne conducted environmental audits of all sites on the ranch that had potential contamination. Although SMI operated approximately 3 percent of the wells on the ranch, the audit revealed that the sites operated by SMI constituted over 47 percent of the total contamination. Consequently, on January 5, 2000, Boyd sent Smith a letter demanding that SMI comply with the surface damage agreement. Rickey Smith responded by letter but did not address Boyd's concerns about contamination. He instead claimed that the surface damage agreement did not apply to SMI. Smith also asserted that Boyd had breached its fiduciary duty to the Partnership, and demanded that Boyd immediately pay the $1.7 million "note."

         Following this exchange, Smith sent a letter to the Texas Railroad Commission protesting Boyd's application for a land farm on the Frying Pan Ranch. Smith represented in the letter that the Partnership owned a 20 percent interest in the surface estate. As a result of this letter, the Commission denied approval of the application and Boyd incurred additional costs of $3, 760 in the application process.

         On February 9, 2000, Smith filed suit against Boyd in Cause No. 00-02-708 in Loving County claiming that the $1.7 million "note" was a present conveyance of 20 percent of the ranch surface. Based on this claim, Smith also asserted it was entitled to 20 percent of the proceeds from the surface of the ranch.

         That same month, Rutter and Boyd negotiated with Titan Resources a farmout agreement of the leases Boyd and Rutter had taken pursuant to the Rutter Agreement. Although Boyd had assigned the Boyd Lease and 232 other leases to Rutter, it had not assigned the Smith Lease because Smith had refused to grant the assignment. As part of the farmout to Titan, Boyd entered into a new surface damage agreement with Titan at its request. Under the terms of this agreement, Titan paid only $75, 000 as surface damages for drilling a well referred to as the Titan Well, rather than the $102, 000 which would have been due under Boyd's standard surface damage agreement.

         At Boyd's request, Titan furnished Smith a draft copy of the Titan farmout and surface damage agreement proposed for the leases and asked that it approve the assignment and farmout agreement. On March 16, 2000, Smith's attorney sent Titan a letter purporting to rescind the Smith Lease, and claiming ownership of 20 percent of the surface estate. The letter demanded that 20 percent of the surface damages paid by Titan for drilling the well be paid into the registry of the court. The letter also represented that the Partnership had amended its suit to seek rescission of the Smith Lease and it threatened to sue the participants in the farmout agreement.

         At this point, Titan had a drilling contract and an available rig, but was unable to proceed without Smith's participation. Even though the Smith Lease constituted only a fraction of the leases necessary to drill the Titan Well, the Partnership was able to force the other parties to accept its terms in order to get the well drilled. The Partnership thus negotiated a farmout agreement with Titan and Boyd that paid an additional $300 per net mineral acre leasing bonus. Under the Rutter Agreement, one-half of that additional leasing bonus should have been paid to Boyd, but under the farmout agreement negotiated by the Partnership, Boyd's half of the bonus in the amount of $3, 018 was instead paid to the Partnership and the Black Family Partnership.

         Boyd subsequently ignored the Partnership's claimed repudiation of the Smith Lease and on July 24, 2000 tendered a check to the Partnership in the amount of $36, 441.87 as payment of the lease bonus due to extend the Smith Lease. The Partnership returned the check on August 14, 2000. On July 25, 2001, Boyd tendered the lease bonus due to the Partnership to extend the Smith Lease a third year, but the Partnership returned this check as well.

         The trial court granted summary judgment in favor of Boyd on Smith's claimed ownership of 20 percent of the surface estate and severed all claims related to ownership of the surface estate into cause number 00-08-713. We affirmed the summary judgment in part, but reversed and remanded in part because a fact issue existed with respect to Smith's claim of mutual mistake. Marrs and Smith, Partnership v. D.K. Boyd Oil and Gas Co., Inc., No. 08-00-00386-CV, 2002 WL 1445334 (Tex.App.--El Paso 2002, no pet.)(not designated for publication). On remand, the trial court rejected the Partnership's claim of mutual mistake but reformed the agreement originally executed on December 16, 1998 to show an effective date of December 10, 1996. [6]

         In this case, the Partnership sought a declaratory judgment related to the Legend Resources mineral purchase. The Partnership also sued Boyd for breach of fiduciary duty related to the executive rights which Boyd had retained. More specifically, the Partnership claimed that Boyd had obtained more favorable terms for itself than the Partnership in several transactions, including the Boyd Lease, the farmout and oil and gas development agreements, surface damage agreements, and seismic options. Boyd asserted counterclaims against the Partnership for tortious interference and slander of title. The case was tried to the court in February 2001 and final judgment was entered on September 3, 2004. The court determined that:

1. the Partnership did not rescind the August 1, 1999 lease;
2. the Partnership did not rescind the ratification of the Smith Lease;
3. the Smith Lease was repudiated prior to trial;
4. the Smith Lease contains identical material provisions as the Boyd Lease; and
5. Boyd has fully performed any obligations owed to the Partnership with respect to the Legend Resources mineral purchase and paid the Partnership all the benefits due from such purchase.

         The court further ordered that Boyd recover from the Partnership the sum of $6, 778 in actual damages, $50, 000 in punitive damages, and $187, 185.10 in attorney's fees through trial plus additional attorney's fees for post-trial and appellate proceedings. The court determined that the Partnership take nothing on its claims, except for a setoff in the amount of $5, 000.

         FAILURE TO FILE FINDINGS OF FACT

         In its first point of error, the Partnership complains that the trial court erred by failing to file findings of fact and conclusions of law. The court ordered the parties to prepare non-binding proposed findings of fact and conclusions of law which were to be filed prior to the beginning of the bench trial:

Neither party shall be bound by its pre-trial filing of such proposed findings, but the same shall be utilized by the Court to organize its consideration of the evidence and to better prepare for trial.

         At the conclusion of the trial, the court sent the parties its draft findings which were not in final form but gave a "strong indication of the Court's position." The letter directed Boyd's counsel to draft a judgment consistent with the findings and an entry of judgment hearing was scheduled for September 3, 2004. The Partnership filed written objections to several of the proposed findings on the ground that they were not supported by the evidence, were contrary to established law, or were irrelevant to the causes of action before the court. The motion requested only that the court sustain its objections to the proposed findings and conclusions. At the entry hearing, the court resolved various concerns before signing the written judgment. The Partnership never filed a written request for formal findings of fact and conclusions of law.

         Rule 296 of the Texas Rules of Civil Procedure provides that in a non-jury trial, a party may request the court to state its findings of fact and conclusions of law. Tex.R.Civ.P. 296. The request must be in writing, must be entitled "Request for Findings of Fact and Conclusions of Law," and must be filed with the clerk of the court within twenty days after the judgment is signed. Id. The trial court is not required to file its findings absent a timely request. See Tex.R.Civ.P. 297. The Partnership candidly admits that it did not file a written request pursuant to Rule 296, but argues that it was entitled to rely on the court's representation that it would enter findings. This argument fails for two reasons. First, the record does not support the assertion that the court represented it would file findings of fact. The court asked the parties to prepare proposed findings to assist the court in its understanding of the evidence. Nothing in the post-trial letter indicated that the court intended to file its draft. Second, the Partnership cites no authority which would allow us to create an exception to the plain requirement of Rule 296 that a party desiring written findings of fact and conclusions of law must file a formal written request. The purpose of Rule 296 is to give a party a right to findings of fact and conclusions of law finally adjudicated after a conventional trial on the merits before the court. IKB Industries (Nigeria) Ltd. v. Pro-Line Corp., 938 S.W.2d 440, 442 (Tex. 1997). This right is contingent upon compliance with Rule 296. Because the trial court did not err by failing to file written findings, we overrule Point of Error One.

         BREACH OF FIDUCIARY DUTY

         In Points of Error Two through Five, the Partnership challenges the legal and factual sufficiency of the evidence supporting the court's determination that Boyd did not breach its fiduciary ...


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